Pace of Economy’s Growth Is Revised Upward [New York Times] and Housing Slump Likely to Take Toll on 4th-Quarter Growth [Wall Street Journal]
Summary: A slew of economic data released yesterday suggests a mixed but largely positive outlook for the U.S. economy: The Commerce Department revised the GDP expansion to a 2.2% annual rate from July through September, up from the 1.6% announced in October. New homes sales dropped 3.2% from September, and a whopping 25.4% y/y, marking the 9th consecutive month of y/y declines over 10% (the longest such stretch since 1991). The residential-fixed-investment component of the GDP, which reflects housing spending, tumbled 18% during the quarter, its biggest drop in 15 years, shaving 1.16% off the growth figure and prompting some economists to predict economic growth will slow in Q4 between 1.5-2%. But beige book figures released yesterday suggest consumer spending is coping with the housing slump: "Despite continued softness in automobile and housing-related sales, most districts reported that consumer spending increased during October and early November," adding that the economy continues to experience "moderate growth." Labor markets remain tight and wage growth was "generally moderate," but "more rapid" in some areas (San Francisco) especially for skilled workers in health care, finance and construction. The Commerce Dept. also updated its personal-consumption index: Excluding food and energy inflation rose 2.2% in the third quarter, down from 2.7% in Q2, suggesting inflation isn't flaring despite signs of climbing wages.
Related links: Department of Commerce GDP News Release (.pdf), Census Bureau Housing Release (.pdf). Commentary: GDP Revised Higher: What's With All These Revisions?! • Housing Data: There Goes The Economy • Homes Sales Up, Prices Down • Bernanke Sounds Positive, Yet Cautious Note on the Economy
Potentially impacted stocks and ETFs: S&P 500 Index (SPY) • NASDAQ 100 Trust Shares ETF (QQQQ) • iShares Russell 2000 Index ETF (IWM) • iShares Lehman 1-3 Year Treasury Bond ETF (SHY) • iShares Lehman 7-10 Yr Treasury Bond ETF (IEF) • iShares Lehman 20+ Year Treasury Bond ETF (TLT)
TECHNOLOGY AND INTERNET
Summary: Insider trading allegations have been added to the shareholder lawsuit against Hewlett-Packard following its executive spying scandal. An amended filing claims top brass at HP -- CEO Mark Hurd and seven other executives -- sold over $40 million in stock in the two weeks preceding the scandal with knowledge of the impending disclosure and likely stock drop. According to the lawsuit, this was the busiest period of stock sales by top HP insiders in five years. The suit further claims that the company initiated a $6 billion buyback program in August, "to prevent a free-fall in the Company's stock price as the news of the defendants' misconduct reached the market." HP replied in a statement that the lawsuit was without basis. HP stock has actually risen about 8% since the investigation was first revealed in a regulatory filing.
Related links: HPQ insider transactions • Media coverage: WSJ . Commentary: H-P Naysayers Are Now Being Heard • HP Plays it Cool With Promising Server Technology • Understanding HP's Changing Profit Margins . Conference call transcripts: Hewlett-Packard F4Q06 (Qtr End 10/31/06) .
Potentially impacted stocks and ETFs: Hewlett-Packard (HPQ)
Summary: Data compiled by market researcher NPD shows Zune took 9% of the U.S. portable digital music player market in its first week of sales, knocking Apple's iPod down to 63% from 70% and replacing SanDisk for the number two spot. USA TODAY reports however, that NPD doesn't track sales for Wal-Mart, Amazon, or the Apple Store. Recent reports show iPod is dominating Amazon's best-selling music player list, with Zune nowhere to be found. Separately, a survey conducted for Reuters during Thanksgiving showed 70%-80% of respondents preferred an iPod, while 7% chose Zune. Interestingly, 35% of those choosing Zune were for upgrades, compared to 18% for iPod. A Gartner analyst comments, "What you might be seeing are upgrades coming from some iPod users but probably more so from people who purchased PlaysForSure devices." One positive signal is 80% of respondents indicated they'd be receiving their first MP3 player, and 69% said they were either 'likely or extremely likely to buy or receive an MP3 player this holiday season.'
Related links: Media coverage: USA TODAY. Commentary: Microsoft's Zzzune (The Sound Of iPods Flying Off The Shelf) • Amazon Stats: iPod Continues To Dominate MP3 Sales • Zune Is DOA -- Sansa Anyone? • Microsoft To Give Portion of Zune Sales To Universal In Attempt To Hurt Apple. Conference call transcripts: Microsoft F1Q07, Apple F4Q06, SanDisk Q3'06.
Potentially impacted stocks and ETFs: Microsoft (MSFT), Apple (AAPL), SanDisk (SNDK) • ETFs: iShares Goldman Sachs Technology Index (IGM), iShares S&P Global Technology (IXN), NASDAQ 100 Trust Shares (QQQQ), Technology Select Sector SPDR (XLK), Vanguard Information Technology (VGT)
3Com Shares Down on Huawei Deal [Business Week]
Summary: Shares of 3Com were sent tumbling more than 10% yesterday after the firm announced it was buying out the 49% stake of Huawei Tech. in their 3Com-Huawei joint-venture. Most analysts had a negative reaction accompanied with at least two downgrades, which created tremendous selling pressure with volume exceeding 60m (compared to a 3-month avg. of about 8m). 3Com will spend $882m, and as an RBC analyst put it, it will only have $32m in cash leftover, "an uncomfortable amount considering that 3Com is operating in a net loss." Analysts at Bear Stearns and Lehman questioned the ability to retain key employees and voiced concern over integration and execution. A Morgan Stanley analyst however, actually welcomed the deal but said, "... we think it is important that 3Com continue to have the rights to use the Huawei brand name in Asia, an issue that remains unresolved ..." Forbes reported 3Com is now better positioned to compete against Cisco in China.
Related links: 3Com press release. Media coverage: Forbes. Commentary: 3Com Ready For Technical and Value Investors • China's Eventual 3G Rollout Could Favor EU Vendors • Cisco's Scorched Earth Policy Claims Another Victim. Conference call transcripts: 3Com F1Q07.
Potentially impacted stocks and ETFs: 3Com (COMS) • Competitor: Cisco (CSCO) • ETFs: Internet Architecture HOLDRs (IAH), iShares Goldman Sachs Networking (IGN)
Summary: TiVo shares dropped 5% after the company reported a lower 3rd quarter loss but forecast a larger loss for the present quarter. The digital video equipment producer's current loss is $11.1 million, or 12 cents per share compared to last year's $14.2 million, or 17 cents per share. Analysts were predicting a decline of 15 cents a share. However, TiVo saw a growth in net revenues from $49.6 million last year to $65.6 million thanks to the 11% increase of subscribers thanks partly to its partnership with Direct TV Group Inc. Shares rose one penny to $6.29 but fell to $5.97 after issuing lower than expected quarterly results on Wednesday.
Related links: Conference call transcripts: TiVo3Q07. Commentary: TiVo Drops On Revenue Miss • TiVo Updates On Subscribers, Broadband, Tuners and More • Motorola Shopping for a Middleware Company? • TiVo Breaks From the Pack With Web Content
Potentially impacted stocks and ETFs: TiVo (TIVO), DirecTV (DTV) • Competitors: Comcast Corp. (CMCSA), Echostar Communications (DISH) • ETFs: PowerShares Dynamic Media (PBS)
Ex-A.I.G. Chief Denies Report He Is Accumulating Times Stock [New York Times]
Summary: Maurice "Hank" Greenberg denied he is attempting to take over the New York Times after rumors sent the stock upward to its highest one-day surge in nearly six years. The former CEO of American International Group Inc. owns only 100,000 shares of over 143 million shares outstanding in the newspaper which is run by the Sulzberger family through special stock which gives them the majority vote. Shares rose $1.73, or 7.5 percent, to $24.76 on the rumors, but fell to $23.74 in after-hours trading after Greenberg issued his statement. A source close to Mr. Greenberg says that he is considering making a bid on Tribune.
Related links: Media coverage: Bloomberg . Commentary: NY Times Shares Jump on Rumors of Major Hank Greenberg Purchase • Citi: New York Times Headed Downhill Due To Internet • NYT: Investor Interest Should Propel Management to Boost Margins • Sharpest Newspaper Circulation Drop in 15 Years. Conference call transcripts: New York Times Q32006 .
Potentially impacted stocks and ETFs: New York Times (NYT), Tribune Company (TRB) • Competitors: Dow Jones (DJ), Gannett Co. Inc (GCI), The Washington Post Co. (WPO), The McClatchy Company (MNI), News Corp. (NWS)
ENERGY AND MATERIALS
Gas Find Shows Shale's Promise [Wall Street Journal]
Summary: EOG Resources Inc. announced yesterday it has discovered a major expansion to the Barnett Shale gas field, and identified four new shale fields in Texas, North Dakota and western Canada, and would increase its exploration spending from $2.8b to $3.4b next year in order to finance an expanded shale-drilling program. The announcement underscores the NG industry's shift from reluctance to enthusiasm over drilling into dense shale. EOG is the fourth-most-active driller in the U.S.; two of the top three drillers, Chesapeake Energy Corp. and XTO Energy Inc. are also exploring shale formations. Until 2000 producers steered clear of the Barnett and other shale formations, believing the rock was too dense to economically pull gas from it. Slowly companies began to understand how to crack the rock and unlock its gas deposits without it becoming cost-prohibitive. The industry believed the only drillable portion of the Barnett was a city-sized area north of downtown Fort Worth, but EOG said yesterday it was drilling productive wells 55 miles to the south. CEO Mark Papa: "The Barnett has extended farther to the south than anyone thought and farther to the west."
Related links: http://www.thebarnettshale.com/. Commentary: Gambling on Natural Gas - SeekingAlpha • Natural Gas is Running Out of Steam • Natural Gas Inventories Not Pressuring Supply in Meaningful Way • Seeking Alpha's Natural Gas Site
Potentially impacted stocks and ETFs: EOG Resources Inc. (EOG), Chesapeake Energy Corp. (CHK), XTO Energy Inc. (XTO), earlier this month Newfield Exploration Co. (NFX) said results from the first few wells in a shale field were good enough to step up its spending • ETFs: iShares Dow Jones US Oil & Gas Exploration Index (IEO), SPDR Oil & Gas Exploration & Production ETF (XOP)
Heinz's Net Profit Drops 6% On Higher Tax Rate [Wall Street Journal]
Summary: H.J. Heinz Company reported a 6% drop in earnings for fiscal Q2, blaming a higher tax rate. Net income fell to $0.57/share from $0.60/share last year. U.S. sales were up 5.4%, sales in Europe were down 0.8%, and Asia Pacific had 6% sales growth. Heinz said it expects to earn $2.35-$2.39/share on the year -- the first time its given a guidance range. Heinz shares, which went nowhere for years, recently jumped on the tails of a highly-publicized proxy fight between it and activist billionaire Nelson Peltz, which resulted in shareholders electing Peltz and his ally Michael F. Weinstein to the company's board. Peltz was pushing for an aggressive growth plan including deep spending cuts and share buybacks. Shares closed yesterday at $43.97.
Related links: Commentary: Jim Cramer's Take on HNZ. Conference call transcripts: Previous transcripts
Potentially impacted stocks and ETFs: H.J. Heinz Company (HNZ), Campbell Soup Co. (CPB), ConAgra Foods Inc. (CAG) • ETFs: PowerShares Dynamic Food & Beverage (PBJ)
Side Effects at the Pharmacy [New York Times]
Summary: It is unclear whether Wal-Mart's new $4 generic drug prescription plan is actually having its desired effect. The company may actually be losing money on the meds in the hopes of making up the business by drawing customers into its stores. But other pharmacies such as CVS are not reporting any change in their underlying business since Wal-Mart launched the plan. “The average co-pay for these drugs is $5.37,” said CVS CEO Thomas M. Ryan. And with Wal-Mart already in the midst of one of its worst holiday seasons in a long time, it is unclear whether the company's decision to forgo co-pay revenue from its pharmacy department will ultimately bring it the additional retail business it desires.
Related links: Media coverage: Consumer Affairs.com. Commentary: Retail Discounters: Hope Their Exotic Investments Excel • Walgreen's Response to Wal-Mart's Drug Assault • Wal-Mart's Cheap Drugs Not as Threatening as they Appear.
Potentially impacted stocks and ETFs: Wal-Mart (WMT), Target (TGT), CVS (CVS), Caremark Rx (CMX), Walgreen (WAG), Rite Aid Corp.(RAD)
Summary: Ford announced that 38,000 workers -- half of its hourly workforce -- have accepted buyout packages. The company will save about $5 billion a year via the buyouts. Ford, however, has lost $7 billion in the first two quarters of this year and expects to lose up to $17 billion through 2009. The company is looking to raise $18 billion in financing to pay for its restructuring. Ford's market share hit a low of 17.6 % on Oct 31, down from 26% in the early '90's. In July, Ford's U.S. sales trailed Toyota's for the first time, but they have picked up since then. Analysts say that cost-cutting will not be enough to revitalize the company; better product development, marketing and pricing are also essential. The buyout packages will be offered through Sept. 1, 2007. Ford shares climbed 2 cents to close at $8.17 on Wednesday.
Related links: Media coverage: MarketWatch, BusinessWeek, CNNMoney.com. Commentary: Top 5 Things the Auto Industry Has to be Thankful For • Highlights From Ford's Sales Conference Call • Ford Bets the Farm To Secure Another Large Loan . Conference call transcripts: Ford Q3 2006 .
Potentially impacted stocks: Ford Motor Co. (F) • Competitors: General Motors (GM), DaimlerChrysler (DCX), Toyota (TM), Honda (HMC), Nissan (OTCPK:NSANY).
Summary: Shares of Dynavax Technologies Corp. increased by nearly 33% yesterday after the drug developer released positive late-stage trial data for its hepatitis B vaccine, Heplisav. The late phase trial was proven to successfully protect the "difficult-to-immunize" over-40 population, which includes patients on kidney dialysis.
Dynavax claimed the data showed its vaccine was superior to conventional hepatitis B vaccines; its two main competitors would be Engerix-B from GlaxoSmithKline and Recombivax from Merck & Co.
Related links: Commentary: Dynavax Shares Jump on Positive Hepatitis Study • New England Journal of Medicine on other DVAX products • Street Insider [sub. req.].
Potentially impacted stocks and ETFs: Dynavax Technologies Corp. (DVIX), GlaxoSmithKline (GSK), Merck & Co. (MRK) • ETFs: PowerShares Dynamic Biotech & Genome (PBE).
HEARD IN ASIA: China Railroads Stay on Track [Wall Street Journal]
Summary: A report published last month by the Chinese Ministry of the Railway said Beijing plans to invest 1.25 trillion yuan (~$160b) by 2010 on track, trains and civil engineering. Analysts are very bullish on the railroad sector in China, but unfortunately for overseas investors, it will be difficult to make a play. Two stocks analysts like in particular, Daqin Railway and China Railway Tielong Container Logistics, only trade in Shanghai as Class-A shares, which non-Chinese cannot purchase directly. One possible play is Guangshen Railway, which is listed in Hong Kong and has ADRs on the NYSE. Deutsche Bank analysts say the sector is a "must own" for the next 2-3 years, adding that, "China's railway sector is at the beginning of its reform cycle. Nearly all parts of the railway supply chain will benefit from this sector transformation." According to a report by the same firm, China handles about 24% of global rail traffic but has only 6% of the world's track.
Related links: Media coverage: China Daily, Xinhua and IHT: Guangshen Railway Plans Share Sale. Commentary: A Bleak Report For The Railroad Industry • Over the summer Marc Gerstein of Reuters included Guangshen Railway in his analysis of railroad stocks.
Potentially impacted stocks and ETFs: Guangshen Railway (GSH), General Electric (GE), Siemens (SI) • ETF: PowerShares Gldn Dragon Halter USX China (PGJ)
Seeking Alpha is not affiliated with Wall Street Journal, New York Times, Reuters, AP, or BusinessWeek.
U.S. Markets: This Market Requires Prudence and Patience
Housing: Housing Data: There Goes The Economy
Long Idea: American Superconductor to Aquire Windtec
Short Idea: Short SanDisk Due To NAND Oversupply
Internet: Memo To Google: Time To Try Links
Telecom: ECI Telecom Appears 'Much Too Cheap'
Hardware: These Five Chip Companies Are LBO Targets -- Prudential
Software: How Broken is Microsoft?
Consumer Electronics: Microsoft's Zzzune (The Sound Of iPods Flying Off The Shelf)
Media: TiVo Drops On Revenue Miss
Healthcare: Pfizer's Wake Up Call
Retail: Are Chico's Inc.'s Diasappointing Results Cause for Concern?
Transport: The Race for Fuel Efficiency is On
Energy: Big Upside Seen For Bronco Drilling
Financial: Online Brokers' Blasè Response To BOA May Come Back To Haunt Them
Asia: Bullish on Japan -- Nikkei Primed for Big Rally
ETFs: Strategies in Tactical Asset Allocation
Small-Caps: Pointer Telocation's Ascent: Why... and Is Sapient Next?
Sound Money Tips: Tips for Winter Health
Jim Cramer: Latest stock picks
Earnings Conference Call Transcripts: Tiffany & Co. • Mobile TeleSystems • Synopsys • TiVo
Have Wall Street Breakfast emailed to you every morning before the market opens (free/no spam).